Question

Describe the channels by which monetary policy ripples through the economy and explain how each channel operates.

Suppose the Bank of Canada lowers the overnight loans rate.

When the Bank of Canada ____ the overnight loans​ rate, it makes an open market purchase.
Other​ short-term interest rates and the exchange rate ____.
The quantity of money and the supply of loanable funds _____.
The​ long-term real interest rate _____
The ____ real interest rate ____ consumption expenditure and investment.
The ____exchange rate makes Canadian exports ____ and imports ______. So net exports _____.
______ interest rates ______ aggregate expenditure.


lowers
fall
increase
falls
lower
increases
lower
cheaper
more costly
increase
Lower
increase

Answer 1

Monetary policy functions through changes in the overnight loan rate, which affect other short-term interest rates, exchange rates, the quantity of money, long-term real interest rates, consumption, investment, and net exports, collectively influencing aggregate expenditure in the economy.

Step-by-step explanation:

When the Bank of Canada lowers the overnight loan rate, it typically engages in an open market purchase to increase the money supply. As a consequence, other short-term interest rates and the exchange rate tend to fall. This lower cost of borrowing stimulates the increase in the quantity of money and the supply of loanable funds.

The availability of more funds at lower interest rates leads to a decrease in the long-term real interest rate, which in turn encourages spending in the economy. A lower real interest rate makes it more attractive for consumers and businesses to increase consumption expenditure and investment. Additionally, a lower exchange rate renders Canadian exports cheaper and imports more costly, consequently increasing net exports.

Overall, these changes result in a scenario where lower interest rates lead to an increase in aggregate expenditure, boosting economic activity.